This is an update to an earlier post really and an observation that getting into the ‘right’ space can pay off in the long run. The earlier post talked about an investment we made in Zagme – one of the earliest mobile advertising plays – and the people around at that time. Two of those people Chris Havemann and Russell Buckley continued with their passions and ended up with Research Now! and Admob respectively. Well what do you know? Both businesses got bought in the last couple of weeks. Research Now! went for around £85m in a sale to VC-backed eRewards where Chris will continue as CEO of the combined entity as well as earning a nice payout. Admob went for a storming $750m to Google. I’ve always said that letting Zagme go was the one big regret from that era…. Entrepreneurs in the online space can take great comfort from these deals and perhaps they serve to remind us that an IPO is not necessary or in ResearchNow!’s case it’s not necessarily an exit itself.

It seems there’s gathering momentum that a New Economy will emerge in the UK post the financial sector meltdown and it will be based on manufacturing – that was the message I took from a Policy Exchange meeting at the Royal Institution today. Well, that’s a load of twaddle of course because what people really mean is some re-balancing between the sectors, whilst we must mention ‘services’ too because actually that’s where we all work more or less isn’t it? It is a serious point though and we really do need to stimulate manufacturing because we quite simply look a bit underweight against certain peers plus we need more output that is as readily exportable as manufactured goods. Otherwise what’s the point of being a trading nation/ an open economy? Clark demonstrated great mastery of his brief and offered thoughts on what might be done about things if the Tories get in next year. For a start, he doesn’t like the idea of supporting national champions and he feels government needs to really understand the value chain before it offers support. Regarding the latter he cites a previous government’s mistake in championing chip manufacture as a way to profit from the computer boom (“fortunately they went bust before we could waste any more money”). He also showed a good grasp of the dynamics in the entrepreneurial sphere – the need to create and support the fast growth companies and the problems facing the VC industry in playing its part in that. He was at pains to say that the Tories’ policies are known only to George Osborne so we can but hope that Osborne is listening to his elders – for now though it was mission-accomplished for KC as we all felt soothed. Meanwhile on the Labour side there was a lot of endorsement for some things that have been brought in – not least the Technology Strategy Board which many people felt was the right configuration at last – even if it’s underfunded and hasn’t quite got all its ideas up and running. If we do indeed change government will they be big enough to keep the good things that have been achieved?

Meanwhile I can’t help feeling that debating the nuances of capital allowances, R&D tax breaks et al might just be a case of ‘fiddling whilst Rome burns’. Aren’t we in the middle of a massive economic crisis – one that has yet to properly impact most of us? Another fairly recent report highlights the role of Defence and related industries in the UK economy… written in an effort to stave off cuts to the sector. Those cuts (as surely there must be some) could have a huge impact on manufacturing in the UK – directly and indirectly. Right now the focus seems to be on reducing the wage bill for government bureaucrats working in Defence and some talk about all our troops getting the equipment they need. I cannot help wondering though whether that equipment is in fact going to be needed. Whilst trying to steer clear of party politics, it strikes me that the warning bells from all points about the Tories’ ‘Little Englander’ stance are well founded. Norway, yes Norway is being mentioned as the model towards which the Tories would like to work.

It’s all so complicated and beyond simple measures how on earth can the politicians sort this all out? I really would like to see a high-tech manufacturing-led recovery but I wouldn’t bet on it would you? I’ll stop on that sobering thought.

Forgot to note the very encouraging turnout for the 23 September Investor Allstars event at the Hilton Park Lane. This event has for me been a bellweather for how the entrepreneurial space is doing: in the past attendance has oscillated from the small and depressed (post tech bust!) to the packed and raucous (2004 was when the vim came back to the sector). If turnout is anything to go by then perhaps VC is regaining confidence as it was very well attended. There was a great deal of earnest networking rather than boozy celebration though and one has to wonder how many of the prize winners can declare real success in early stage investing. Chairwoman and organiser Sara Williams did in fact tell the audience to pull themselves together because recent performance of this asset class is dire. Steeping back from this year’s headlines, it is good to see the people behind this all maturing their own businesses and market positions – particularly GP Bullhound, Business XL PER recruitment et al. I always admire people who stick with such initiatives rather than the ‘one quick slug from this year’s marketing budget’ type of firms – somebody’s got to build the community right?. p.s. John Moulton who sat with us had his foot in plaster, furiously denying it was from kicking his old colleagues at Alchemy 😉

Last week I spent two evenings at rather different spectator events – the first listening to Robin Klein at London Business School and the second watching David Hare’s new play about the economic crisis The Power of Yes at the National Theatre. I have to say that I much preferred the former to the latter, not just because of the difference in ticket price I assure you! The play wasn’t the best I’ve seen – more of a Panorama-style documentary to explain to the man in the street what’s been going on. Amusing to see actors portray Ronald Cohen, John Moulton, Adair Turner and others. In fact the latter was sitting two rows in front of me and wore an expression of smiling relief having come out of it without criticism. To my eye the audience was full of retired folk who probably came to see why they’d lost their pensions. Wise then to steer clear of the stories about Madoff and Stanford and focus instead on what was wrong with the mainstream financial sector – apparently awful people like Adam Applegarth and Fred Goodwin. “Ronald Cohen” told us that on a scale between ‘interested in people’ and ‘interested in business’ Fred scored 100% at the latter end.

The stand-out lesson was about human nature – we are mainly influenced by our own recent past. A long bull run and nobody remembers what went before indeed nobody remembers to even question what’s going on. Is it enough for the banks to say ‘we had to do it because everyone else was’. George Soros was quoted relating his own emigrant past to his personal expectation of discontinuous change.

Robin’s talk described his journey from buying into a tiny engineering business, relocating to the UK, a tense brush with a leveraged buyout, elevation to Corporate Executive and finally to a position where he was able to capitalise on the rise of the internet in consumer-facing businesses. Now of course an investor in many early stage startups. Some parallels with Soros’s formative years. For me one section of the Q&A served to underline that setting up a venture capital fund staffed by analysts and deal-doers who lack mainstream commercial experience is more or less hopeless. I am sure that’s one reason why performance in this asset class has been so poor. Robin presented many learning points; David Hare sadly too few.

Reflecting on Google UK’s Retail Conference earlier this week it was striking that retail seems to be balanced right on the edge between ‘we have shops and a web division’ and ‘we have clicks and mortar integrated’. The cultural and organisational barriers are ever more obvious in this transition. Star turn was Richard Last from J.C.Penney in the US who revealed that some colleagues regard the store network as billboards for the website. After an hilarious run of asides from Ian Jindal I ran a panel with the unpromising title of ‘KPIs’ but fortunately Michael Ross of ecommera, Tony Stockil of Javelin Group, Richard Lowe of Barclays Bank, Neil Saunders of Verdict Research and Pete Bitsakis of ValueClick Europe had plenty to say. The focus on website data is relentless and it would appear this will yield plenty more prizes and threats. As Michael pointed out, if you cannot spend time walking around the store you can only rely on your web data to interpret performance – obvious, but not to a retail executive who spent 20 years walking the shop floor. Threats abound too – if price was your point of difference before you’d better think again. It’s becoming apparent that for many the battle to live or die will be fought on the web and your strategy has to be based in the hard facts reflected in your web data. Tony pointed out that he used to be able to compare retail chains on three key measures – now the question is which measure to choose on the web where data on shopping behaviour is abundant but more complex. So objectivity is needed but we also need to apply our instincts…. cue great quote from Mintzberg “The conception of strategy is an exercise in synthesis, which is best carried out in a single informed brain. That is why the entrepreneurial mode is at the center of the most glorious corporate successes.”

The headline quote comes from a front-page article this week on CNNMoney news website relating how doctors in the US are quitting medicine because of money woes. Meanwhile here in the UK we see headlines that doctors in Primary Care here are overpaid. Having spent some time recently with a bunch of enterprising ophthalmic surgeons and practice managers I was struck by the tensions between care for the patient and commercial success – tensions that every health service around the world is trying to deal with. Looking at the eye surgeon example there seem to be several moving parts to these stories, ones which would yield to some entrepreneurial business thinking.

Firstly, a surgeon has to ask his/her self whether they can do their work more efficiently. Here I mean at the level of the core work – fixing a cataract say. The answer seems to be a resounding yes – procedures that take 15 minutes for one person can be done in half the time, maybe 10% of the time with skill and dedication to continuous improvement. I discovered lots of great examples of process innovation by surgeons. This innovation extended to other processes within the ‘total solution’ they are providing such as how things are managed pre and post op. I got the feeling that if every surgeon could move closer to some benchmark performance on all aspects then there is a huge latent capacity that could be freed up. Not only that but dedication to the tenets of process improvement and quality could assuage surgeons’ worries that they were taking risks with patient health. Of course many doctors work within perverse incentive systems that penalise continuous improvement….. exactly the thing that politicians are trying to tackle within the bureaucracies that are today’s modern health systems.

Meanwhile there are some real parallels with entrepreneurs – the biggest being that you’ve actually got to want to grow in either expertise or activity level. Once you’ve really committed to growth and accepted the personal risk it entails then a whole raft of possibilities open up. Maybe our health systems should be looking for those surgeons who really want to go for it, much like governments try to identify fast growth businesses?

Whilst everyone waits anxiously to see whether we can navigate out of the current mess in banking there has so far been precious little that indicates things are really going to be different ‘afterwards’, whenever that is. The most obvious example is that banking bonuses clearly will stay the same unless legislation is attempted. We’re witnessing how practically difficult that might be. What of the business banking that matters to the entrepreneur though? That too has complications. The big bank likely to take radical action is RBS. Formerly run by Britain’s most admiredbanker Sir Fred Goodwin it is now ‘controversially’ run by Stephen Hester. I say controversially because apart from his shocking compensation package (after all he won’t be hanging around to end of contract will he and could do it for nothing and reap glory couldn’t he?) he also has to find a ‘Plan B’. His Plan A was to cut back to the UK core banking position but that doesn’t seem to anticipate the strength of feeling at large towards banks. That feeling is driving a political agenda that surely will demand a restructuring of their UK business. Oops! Need a new vision chaps. His career shows definite flair for leadership but if the plan lacks substance don’t we just get another personality cult? The Telegraph might have anticipated this:

“If there is a possible weakness in Mr Hester’s business approach it could be with his political skills. Taking over a partly – possibly fully – nationalised bank will require immense diplomacy in dealing with civil servants and ministers. Although he is known for his support of transparency and openness, Mr Hester is also famed for the way he dominates meetings, imposing his will as much by force of personality as intellect. Having politicians and civil servants, some of whom may be on his new board, as paymasters rather than private shareholders will present an altogether different challenge.”

Meanwhile we are getting snippets of what might emerge in the gaps left by rudderless big banks. Sandy Chen is looking to set up a new bank, albeit with small capital to start with. There could be great chunks of commercial banking oprations to pick up or prey on, not least RBS. Naturally, Richard Branson is also said to be thinking of having a go but then again he would wouldn’t he?

So far it is hard to see a logic whereby entrepreneurs can really expect banking to improve – at some level of course modern credit-scoring plus market segmentation lead to rational ‘abandonment’ of smaller and medium sized clients. At another though, given the disruption afoot, now is the time for business owners to make their needs clear: get your bankers to pitch for business and regularly consider switiching around until and unless you see real added value beyond the commodity service. No more Mr Nice Guy!

Seeing the news last night about John Moulton quitting Alchemy made me reflect on the passing of another of the old guard out of the mainstream. Of course we’ll still hear about John and likely he’ll still do deals but Alchemy was in many ways a tangible expression of his philosophy and style for venture capital. Can we forget him trying to do the Rover deal – promising to revive the British sports car – when everyone else thought it too hard (though of course he was thwarted). Similarly Ronald Cohen at Apax (another house that has morphed from VC to PE). We will forever associate them with a buccaneering era for the industry – when it was being formed and shaped. Am I allowed to use the term buccaneer? Hope the FSA aren’t listening. Another figure from that era is Michael Stoddart whose Electra was one of the pioneers – he’s still involved at FFP of course. I ought to mention that Michael was so generous in his help in moving entrepreneurship forward at London Business School – he like Moulton and Cohen had great instincts for seeing opportunities. So many of the generation they nurtured grew up alongside each other on the BVCA courses or at 3i during its now-abandoned VC phase (another strategic cock-up). Now who replaces these and other figures from that era? There seem to be a lot of ‘professionals’ – by which I really mean ‘company men’ who have followed career tracks in banking and accounting. These were always breeding grounds for VCs but of course banks and accounting practices have developed more homogeneous standards, become machines that feed anonymous executives who can navigate the internal politics. Gone is the camaraderie of being a young ‘Investment Exec’ at 3i or sitting in those BVCA courses. I guess you’d expect all this in a maturing industry that is growing out of its cottage-industry roots. Am I alone though in wondering whether we’ve lost something along the way? Some flair, a real nose for a deal, an entrepreneurial creativity that sees beyond all that expensive due diligence? I don’t know the team that John leaves behind at Alchemy but his resignation letter is pretty clear in saying they are unproven. How can people become so senior in the industry and not be incredibly well-known? I’m sure the VC industry is bigger and more professional than it used to be but where are the new personalities to inspire us and to figure out where to go next in these desperate times?

London this Summer seems a strange place – ominously quiet both from the point of view of the thin crowds of commuters and, from what I can tell, low level of business activity. A lot of people on vacation as there seems little point in hanging around thrashing for sales that aren’t there? Deloitte have published their Entrepreneurship UK survey (“starring” me and James Caan ha ha!) and of course it ain’t good news but shows in detail some of the symptoms of the crisis. We’ve got some roadshow sessions with business owners coming up and it will be instructive I think to hear their latest thoughts since the survey was completed and after this strange summer recess.

Now, the survey results are definitely worth a read as there are some really interesting insights in there. One that is worth noting is the sudden acceleration in people’s desire for an exit. Whereas last year plenty of people thought an exit would be found opportunistically or wasn’t even in the plan, this year it is very much on the agenda. Contrast that with a conversation with an entrepreneur I was with yesterday (a case study in progress!): he was always looking to make money from an exit and so from the very start was disciplined in creating such an opportunity. He knew for example that by taking significant venture funding that a simple calculation using expected returns got him to quite a large target valuation within a 7 year time-frame. Another calculation suggested that there was no way he could get that valuation based on ‘normal’ multiples of sales/ profit – his exit valuation had to be based on the price a strategic buyer would eventually pay. So the whole plan and its execution had to be based on a strategy that made that business highly desirable to a large Corporate able to pay a premium. He got it – in fact at twice the price his VC had at first accepted. This example is a solid reminder that if you don’t consider an eventual exit in your plan perhaps you don’t really have a strategy worth the name.

The other side of the survey data is of course that lots of owners have suddenly decided to exit the business so that must mean bargains for anyone looking to buy right? More anon on that topic…

That’s a slightly odd question I know but it popped into my head after moderating a panel at Google’s eCommerce Summit. The panel included Mark Inskip, Director of Digital EMEA, Accenture, Simon Curry CEO, DABS, Angus Cormie, eCommerce Director, Dell, Daniel Kerzner,Regional Director of Marketing, Starwood Hotels & Resorts. In other words they really knew what they were talking about when discussing internet sales and marketing. The great news was that in answer to an audience question “are you finished with the old SEO, SEM et al methods now?” everyone agreed that there is plenty more potential simply getting better at understanding your traffic, conversion, customer segmentation, price discrimination, total cost of ownership… the list goes on. We heard plenty of stories about the techniques that are being discovered, deployed and honed by these businesses.

The message I heard though was that eCommerce continues to be driven by vigorous analysis of numbers and logical deduction. When an analytical approach seems to give diminishing returns in eCommerce there is always another level of precision and detail that can be plumbed to grow sales and margin. That seems to be something lost in the offline world. You might say that before the internet we got stuck in the empirical point of view – i.e. “we do this because we found it usually works”, rather than trying to figure out why it actually works. Consequently this basically anglo-saxon point of view was manifest in a joke about the French in business who are alleged to say “that’s fine in practise but it’ll never work in theory”. The reason the French suffered this insult is that the thinking of Rene Descartes has had such a profound effect on the country and its philosophy – what some people call Cartesian logic. Descartes wasn’t satisfied with empricial ideas – his approach was to dismiss them but then try to rebuild them from scientific investigation and logic. He wanted to show why things worked.

Looks to me as if this Cartesian approach is the very best discipline to apply in eCommerce. Empirical approaches are dangerous because you are doing the right things without knowing why they are right – dangerous because things change quickly. So I think I am now advocating that we all get reeducated the French way!!!

By the way, when I asked for an example of an eCommerce business that my panel admired they said Pixmania. Started in Paris didn’t it? Q.E.D.